If deficit spending were stimulus, France would be king

Les Moody Blues

Moody's stripped France of its triple-A rating last week, citing "deteriorating economic prospects," the "long-standing rigidities of its labor, goods and services markets" and "exposure to peripheral Europe." And it could get worse: "We would downgrade the rating further in the event of an additional material deterioration in France's economic prospects," says Dietmar Hornung, Moody's lead analyst for France.

Don't think, however, that the French government is unduly alarmed. Finance Minister Pierre Moscovici insisted that the downgrade did not "call into question the economic fundamentals of our country." We've never made a fetish of the opinions of the ratings agencies, which tend to be lagging indicators. Nonetheless, the "fundamentals" Mr. Moscovici points to are worth a closer look.

In 1981, when the Socialist government of Francois Mitterrand took office, France's national debt amounted to 22% of GDP. In the intervening years France's economy has grown by an inflation-adjusted 73%, while the national debt—now at 90% of GDP—grew by 609% in real terms. In raw numbers, that comes to about €1.7 trillion in additional debt. At no time in those 31 years did any French government balance a budget, much less run a surplus.

All this amounts to one of the free world's longest-running experiments in the real-world effects of stimulus spending. If the fabled Keynesian multiplier really existed, all that spending should have translated into robust economic growth for France. Instead, the only thing that's been multiplied is France's debt.

President Francois Hollande is now bemoaning the supposed growth-killing effects of the spending cuts being demanded of him by the European Union. Yet if deficit spending could stimulate an economy, France would not be looking over the border with envy at Germany's growth, debt and unemployment figures. Nor would it again be trying to explain away another debt downgrade.